Insurers brace for $500m-plus claims

By Eric Johnston

10 February 2009 — 12:00am

THE underwriters Insurance Australia Group (IAG) and Suncorp Metway are expected to tap reinsurance contracts to cover the $500 million-plus in payouts already looming for the devastating Victorian fires.

Speculation is mounting the hefty payouts could push IAG to follow Suncorp and launch its own capital raising given its balance sheet has been depleted from exposure to a string of natural disasters over recent years.

Like most investors, insurance companies have been hit with substantial losses on the value of their share and bond portfolios because of turbulent markets.

The industry last year was hit with about $1.2 billion in claims and payouts - more than double the previous year - after a series of storms, mostly on the outskirts of Sydney and in south-eastern Queensland.

The heavy insurance losses are expected to spur further rises in housing and car premiums across the country, with the key insurers already pushing through increases of up to 9 per cent on some lines of personal insurance.

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Shares in both firms fell sharply yesterday - they are expected to carry the bulk of insurance exposure to what is shaping as one of Victoria's most costly disasters.

IAG, which operates brands such as NRMA, closed down 9.5 per cent at $3.24, and Suncorp, which owns GIO and AAMI, fell more than 20 per cent, ending at $5.31. Falls in Suncorp were heavier as it resumed trading after it finalised the institutional component of its heavily discounted $1 billion-plus capital raising program. A third listed insurer, QBE, is thought to have limited exposure to the disaster.

While IAG and Suncorp said it was too early to offer estimates on the likely claims bill from the bushfires, analysts, including James Coghill of Deutsche Bank, said insured losses could run to at least $500 million.

He said this number could double if substantial commercial and agricultural claims emerged.

Under Suncorp's reinsurance arrangements, catastrophe cover applies to events costing greater than $150 million, as well as cover for multiple separate claims events in excess of $10 million that combined cost more than $250 million in financial 2009.

But some doubt surrounds Suncorp's reinsurance arrangements. Last week it revealed that it was in dispute with one member of its reinsurance consortium, over claims totalling $73 million to cover payouts for storms that ravaged Brisbane in November.

Suncorp yesterday said it expected to provide an update over its reinsurance position toward the end of the month.

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IAG reinsurance arrangements come in much lower. Single-event losses are covered for claims of more than $126 million, meaning the weekend's fires would not represent a "financial blowout", according to Ryan Fisher, of Goldman Sachs JBWere. But a series of storm-linked payouts in NSW and parts of Queensland in recent months has put the insurance giant on track to hit its budgeted large loss payouts of $314 million for the year with about 4½ months to run.

Further payouts "will put even more strain on the group's already-pressured capital ratios", Mr Fisher said.